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In this tutorial, we focus on analyzing financial statements, particularly the inventory aspect. We introduce the inventory turnover ratio, defined by the equation: Inventory Turnover Ratio = Cost of Goods Sold (COGS) / Average Inventory. The average inventory is calculated by adding beginning and ending inventory balances and dividing by two. This ratio assesses a company's efficiency in managing its inventory, indicating how many times inventory is sold and replaced over a period. COGS represents the total cost of inventory sold during that time, influencing the inventory turnover metric and providing insights into sales activity and inventory management.
